Written in the 19th century to promote creation of a united Germany from numerous sovereign statelets, “Germany above all” is out of step with the 21st-century country that is the anchor of a much larger unified economic zone with a joint currency — the euro
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And yet, “Germany above all” seems to be the blinkered philosophy of Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble. They have repeatedly rejected entreaties from all sides to reduce the country’s current-account surplus by stimulating domestic demand through government spending.

In a report out this week, the International Monetary Fund put numbers to what economists have criticized as the central problem in the euro zone — Germany’s ability to export with an undervalued currency is creating imbalances within the zone to the severe disadvantage of peripheral countries mired in debt.

Bloomberg

Angela Merkel in September.

Germany’s current-account surplus was 7.5% of gross domestic product in 2013, corresponding to a cyclically adjusted surplus of 8.25%, the IMF said.

“The cyclically adjusted current-account balance is 3-6 percentage points of GDP stronger than the value implied by fundamentals and desirable policies,” the IMF economists said in the agency’s multi-country report on external sectors.

The report goes on to say that Germany’s real effective exchange rate currently is undervalued anywhere from 5% to 15%, and is 6 percentage points below its historical average over the period 1979-2013.

The mirror image of this is the IMF estimate that France and Italy are laboring under a currency that is up to 10% overvalued, while in Spain the overvaluation is 14%

The IMF’s recommended policy response for Germany: “Policies which focus on boosting growth potential, including higher public and private investment as well as service-sector reform, would raise domestic demand and lower the German current-account surplus, as well as would have beneficial spillovers to the rest of the European Union.”

In its country report on Germany earlier in July, the IMF noted that Germany has the “fiscal space to finance an increase in needed public investment,” and suggested that spending on transport infrastructure in particular would benefit both Germany and the euro zone.

German officials claim that the country’s export surplus is a result of superior products, the hard work of the virtuous German employees, and the political courage of the government in putting through labor-market reforms. That may all be true, but it begs the question of how Germany also benefits from an undervalued currency.

When these officials go on to say that Germany’s export prowess is a model that should be imitated — even as other euro economies remain depressed with an overvalued currency — they are being disingenuous, and to the extent smart people like Merkel and Schäuble know better, intellectually dishonest.

In any case, the question now arises whether the newly designated president of the European Commission, Jean-Claude Juncker, will confront the German government for its violation of new rules limiting current-account surpluses to 6% of GDP.

Juncker should demand that Germany come up with an action plan to reduce the deficit. If there is insufficient progress in reducing the surplus, the EU could eventually levy fines against Germany.

Much of the speculation in Europe is whether Juncker, who was propelled into his position after Merkel threw her support behind him, will actually have the gumption to confront Germany in this fashion.

But it would be the height of hypocrisy for Germany, which has been such a stickler for the euro’s debt and deficit limits when other countries exceed them, to brush off its own violation of macroeconomic limits that are equally valid and important.

In its drive for that chimera of politicians impervious to the evolution of economic thought over the past century — the balanced budget — the Merkel government has resolutely reduced government spending instead of increasing it to stimulate domestic demand.

Schäuble hailed the 2015 draft budget approved in July by the cabinet as “milestone” because it calls for no new debt.

Relying on estimates of rising tax revenue that some saw as too optimistic to cover increases in public investment, the Berlin Finance Ministry smugly claimed, “To consolidate the budget and at the same time take measures to crank up the economy is no contradiction in itself.”

Even if this investment does materialize, it falls short of the using the “fiscal space” — the capacity for new borrowing — urged by the IMF.

For Merkel and Schäuble, in short, all that counts is what in their view they judge to be good for Germans and Germany. The fact that the country that enjoys the main benefits from a currency union also has obligations to that union does not seem to enter into their calculation.

So when Merkel has occasion to join in the national anthem and sing “Deutschland über alles,” she means it.

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